Afghanistan’s push to develop its mineral resources

As Western powers prepare to fully withdraw their troops from Afghanistan by the end of 2014, Afghanistan’s Minister of Mines, His Excellency Wahidullah Shahrani, is preparing for a very different kind of deployment.

With recent television interviews on CNBC, webcasts on Mineweb and advertisements on other websites, a presentation at the Mines and Money conference in London and an upcoming talk at the PDAC in Toronto, Shahrani has launched a large publicity campaign in an effort to reel in prospective investors and try to develop his country’s vast and largely untapped mineral resources.

Afghanistan is endowed with extensive deposits of copper, iron, coal, precious metals and hydrocarbons, Shahrani says, and even has the potential to become “the Saudia Arabia of lithium.” Generations of instability have resulted in little prior exploration, however, compounded by inadequate infrastructure required for mine development and transportation.

Now, the government of Afghanistan is out to change this, and is offering mining companies a “competitive and stable fiscal regime,” security forces for mining projects, and five- and 10-year plans for infrastructure improvements.

Previously regarded as one of the country’s more corrupt government ministries, Afghanistan’s Ministry of Mines was overhauled by Shahrani after his appointment in January 2010, and now sees itself as strictly a regulator rather than as a state-owned partner.

Afghanistan is looking to develop its resource sector with private sector development only, and now offers a relatively low corporate tax rate of 20% for mining companies along with a simple royalty structure that includes an additional surface usage fee. There is also an unlimited loss carry forward.

The ministry has announced plans to hire up to 7,000 security personnel that will form part of its “Mines Protection Unit,” which is designed to safeguard large mining projects across the war-torn country. Initially, only those projects in relatively safer provinces will be put forward for development.

Shahrani notes there are currently 1,500 security personnel posted at the massive Aynak copper deposit south of Kabul being developed by the state-owned Chinese Metallurgical Group (CMG). There have been no reported security incidents there in four years, according to the minister.

CMG won the tender process for Aynak in late 2007 after agreeing to shell out nearly US$3 billion to build the mine and its corresponding infrastructure, including a 400-megawatt coal-fired power plant and what would be Afghanistan’s first freight railway. Some unconfirmed estimates suggest the deposit currently contains around 11 to 13 million tonnes of copper.

Aynak is regarded as a crucial litmus test for other possible mining investments in Afghanistan, as although the mine is in a relatively secure part of the country, the railway and electric power lines would be difficult to defend around the clock from guerrilla attacks by Taliban militants.

The Chinese group reportedly beat out bids from at least four other firms considered finalists. They included Canada’s Hunter Dickinson Group, Russia’s Basic Element Group, the London-based Kazakhmys Consortium, and former U.S. copper miner Phelps Dodge.

A new beginning

On Dec. 6, 2011, the government of Afghanistan opened the competitive tender process for four new early-stage mining projects through the Ministry of Mines, using the help of advisers Canaccord Genuity, SRK Consulting and Mayer Brown. All four exploration licences cover roughly 250 sq. km each.

The Badakhshan gold project, a gold-bearing quartz vein system, is situated in northern Afghanistan’s mountainous terrain near the borders with Tajikistan, China and Pakistan. Extensive sampling and trenching were completed on parts of the property by Soviet and Afghan geologists in the 1960s, outlining historical reserves of about 38,700 oz. gold with an average grade of 4.8 grams gold per tonne.

The Zarkashan copper-gold project is located around 225 km southwest of Kabul and about 93 km north of the nearest city, Ghazni. Work completed there by the German Geological Survey in the 1960s, as well as further work done by the Soviets and Afghans in the 1970s, show that skarn mineralization at Zarkashan has a core of relatively high gold grades with a halo of lower grades.

The Balkhab copper project is a VMS-type deposit located in north-central Afghanistan. The Minstry of Mines says there is evidence of mineral extraction activities on site dating back almost 3,000 years, and recent work was initiated by the Afghanistan Geological Survey at the request of villagers in the region.

Finally, the Shaida copper-porphyry project is in western Afghanistan and has seen more advanced exploration work than the other properties. Drill data from the Soviets in the early 1970s has been compiled into a GIS database, along with information from airborne surveys completed by the U.S. Geological Survey team in 2005. Several continuous intervals of mineralization were identified, with copper grades of between 0.1% to 0.8% over intervals ranging from 0.8 metre to 17.95 metres.

The launch of the four mineral tenders follows the announcement last month that a consortium of Indian companies led by the state-owned Steel Authority of India have secured a US$10.3 billion deal to explore and mine three iron ore blocks comprising the Hajigak deposit. The deposit contains an estimated two billion tonnes of iron ore, with production expected to begin around 2015.

A fourth block was awarded to Toronto-based Kilo Gold Mines (kgl-v), though the company later said its bid was prepared by an independent group. In return for using its credentials, Kilo will receive a 20% interest in a new company started by a U.K.-based financier named David Buckle, subject to dilution but with no financing obligation. The new company would be responsible for the financing and management of the project.

Battling perception

Afghanistan nevertheless remains seen by many as being too dangerous for long-term or short-term investment, though higher metals prices and a diminishing supply of world-class projects are pushing companies toward new and riskier frontiers. Earlier this year, the United States government was promoting the country as a destination for “combat geology,” encouraging mining experts and university students to make the trip to Afghanistan to practice their science in the field where there is a possibility, however large or small, of being killed.

Also this year, geophysical surveyor Aeroquest International (aql-t) signed a deal to provide up to US$10-million worth of airborne geophysical services to the United States Geological Survey in Afghanistan. The deal was cancelled shortly thereafter after a more detailed assessment of security risks.

No other publicly listed Canadian mining companies appear to be currently active in the country, although this may be set to change with the completion of the new tender process in the new year.